Chapter 25
Mergers, LBOs, Divestitures, and Holding Companies
ANSWERS TO END-OF-CHAPTER QUESTIONS
25-1 a. Synergy occurs when the whole is greater than the sum of its parts. When applied to mergers, a synergistic merger occurs when the postmerger earnings exceed the sum of the separate companies' premerger earnings. A merger is the joining of two firms to form a single firm.
b. A horizontal merger is a merger between two companies in the same line of business. In a vertical merger, a company acquires another firm that is "upstream" or "downstream"; for example, an automobile manufacturer acquires a steel producer. A congeneric merger involves firms that are interrelated, but not identical, lines of business. One example is Prudential's acquisition of Bache & Company. In a conglomerate merger, unrelated enterprises combine, such as Mobil Oil and Montgomery Ward.
c. A friendly merger occurs when the target company's management agrees to the merger and recommends that shareholders approve the deal. In a hostile merger, the management of the target company resists the offer. A defensive merger occurs when one company acquires another to help ward off a hostile merger attempt. A tender offer is the offer of one firm to buy the stock of another by going directly to the stockholders, frequently over the opposition of the target company's management. A target company is a firm that another company seeks to acquire. Breakup value is a firm's value if its assets are sold off in pieces. An acquiring company is a company that seeks to acquire another firm.
d. An operating merger occurs when the operations of two companies are integr ...